The Microsoft Puzzle

Well, I am glad we got around to Microsoft! I had forgotten for the moment that you have a law degree–from Yale, no less.

You’re handicapping of the appeals court sounds to me like it’s right on the money. One proviso: Judge Jackson’s findings of fact might be so well grounded in the actual facts that the appeals court doesn’t quibble with them, and then–game over. But I am nowhere near close enough to the situation to assess the actual merits of the case

In fact, let me repeat that: On this one, I am just a regular guy who reads the papers like everybody else, so correct me if I am wrong. I am going to jump to your BTW: Is an appeals court battle good for the stock?

My question is: Are these the kind of guys that you want to be holding your money? Sure, they made a mint so far—heck, they are minting new mints all the time, for their shareholders and for their Microserfs. But, as you say, they have been arrogant. They’ve brought a lot of this on themselves. There is a strong argument that the company’s broken-up components would trade separately for a total value of more than the existing stock (i.e., like AT&T did over the long run, I think). But Gates, Ballmer & Co. might rather screw up the company with an expensive and time consuming antitrust fight.

The Wall Street Journal ran a compelling story on Monday about the company’s handling of its new “Next Generation Windows Services.” Basically, the new product is a super- operating system designed to extend the dominance of Microsoft’s Windows system onto the Internet, PalmPilots, and cell phones. That’s surely something investors would love, and loyal Microsoft users might dig it, too. But the company doesn’t dare just come out and crow about it–“Try our terrific new super-operating system. We’re extending our PC dominance into new markets!”–because they have to tread lightly around the ongoing antitrust case. So, there is some evidence that the glare of the legal battle is making the company’s executives take their eyes off the ball. Is this the first time that Gates and Ballmer are forced to choose between defending their own power and doing what is best for shareholders? And are they picking their power?

To me, continuing to fight the legal battle really makes sense only if Microsoft’s core strength is actually in using its stranglehold on the market for operating systems to sell expensive upgrades, muscle around its partners and competitors, and coerce its way into control of new markets. In that case, a breakup is a disaster. If the company is a better monopolist than software maker, then a breakup means it is leaving the business it knows best (monopoly) for a much trickier one (software). But then its components would be worth much less after a breakup, so why hold the shares at these prices with the possibility hovering in the air?

Well, I have learned something new about myself this week: I can come off like a grumpy crank sometimes. But it has been a lot of fun. And, in case you were wondering, my kindhearted landlord agreed to a compromise on my rent increase: up $250 a month next year, and another big increase “to market” the year after that. You never know. Given the stock market’s uncertain disposition lately, New York could feel like a whole different city by then.